On August 27, the Justice Department announced that it had resolved its money laundering investigation into the Las Vegas Sands Corp. (“Sands”) and that the Sands had agreed to “return” $47,400,300 to the Government in order to avoid criminal prosecution. For more about the case, see here and here.

A brief history of the Sands’ recent legal troubles is in order. First, the Sands is a publicly traded company (“LVS”), and its Chairman and CEO is Sheldon Adelson, who made headlines throughout the 2012 presidential election process for his outspoken support of Mitt Romney and criticism of Barack Obama. (We have no idea whether Mr. Adelson himself has been a lightning rod drawing the ire of the Obama administration, and we will not speculate.) Second, the Justice Department’s money laundering investigation into the Sands is not its only investigation. As has been reported here, here and here, the Sands has also been the subject of an investigation into alleged Foreign Corrupt Practices Act (FCPA) violations related to its development of properties in Macau and China. The Sands actually reported to the SEC that the violations actually occurred, and Mr. Adelson and other members of the Sands Board of Directors are now defendants in multiple shareholder derivative suits alleging that they failed to stop the violations from occurring and thereby breached the fiduciary duties they owed to the Sands; see here. (Generally, in order to assert a derivative claim, the derivative plaintiff must show “either (1) that the directors knew or (2) should have known that violations of law were occurring and, in either event, (3) that the directors took no steps in a good faith effort to prevent or remedy that situation, and (4) that such failure proximately resulted in the losses complained of…” e.g.Stone v. Ritter, 911 A.2d 362 (Del. 2006)). The resolution of this money laundering investigation does not appear to resolve the FCPA investigation, and may prove to be additional fodder for the derivative claims. Copies of the derivative suits are available here and here.

Like the FCPA investigation, the money laundering investigation has been in the headlines for quite some time. In January, the Wall Street Journal reported that the Sands was bolstering its anti-money laundering compliance program, and ceased “executing international money transfers for its high-rolling customers”¦” In June, the Journal reported that a grand jury had been empaneled in Los Angeles to investigate the money laundering investigations, and that the investigation was being led by the U.S. Attorney’s Office in Los Angeles. In July, the Las Vegas Review-Journal reported that as part of its compliance program overhaul, the Sands had retained Jerry Markling to be the Venetian’s new Director of Investigations. As the Review-Journal explained, Mr. Markling was formerly the Gaming Control Board’s Chief of Enforcement, and was able to circumvent the State of Nevada’s one year “cooling off period” because he had held his position as Chief of Enforcement longer than the “cooling off period” had been in place.

As discussed by the Wall Street Journal, the money laundering investigation followed the Sands’ relationship with two high rollers. The first, Zhenli Ye Gon, was charged in Mexico for manufacturing ingredients used in the manufacturing of methamphetamines and wiring the proceeds of his sales to himself at Sands-operated casinos in Las Vegas. All told, Zhenli received well in excess of $100,000,000, and according to the Justice Department’s press release, the Sands did virtually nothing to identify the source of the funds. As discussed in the press release,

The money being paid the United States represents money sent to the Venetian casino by or on behalf of Zhenli Ye Gon, who at the end of 2006 or early 2007 was “the largest all-cash, up-front gambler the Venetian-Palazzo had ever had to that point,” according to the non-prosecution agreement. In March 2007, Ye Gon’s residence in Mexico City was searched by law enforcement authorities, who seized approximately $207 million in United States currency from the residence in what remains the largest-ever seizure of currency by law enforcement.

Ye Gon was indicted by federal officials in the District of Columbia on narcotics charges, but that case was dismissed in 2009. Ye Gon is currently pending extradition to Mexico, which has charged him with drug trafficking offenses.

According to the agreement, prosecutors believe that in October 2006, prior to Ye Gon being publicly linked to drug trafficking as a result of the search of his residence, officials at the Venetian-Palazzo, should have identified as “suspicious” Ye Gon’s financial transactions, which included the wire transfer of approximately $45 million and depositing of approximately $13 million in cashier’s checks between February 2005 and continuing through March 2007. Casino officials should have filed one or more SARCs against Ye Gon in addition to a SARC it filed in April 2007, prosecutors contend.

For its part, the Las Vegas Sands, while unaware of Ye Gon’s alleged criminal activities prior to March 2007, acknowledges that “in hindsight…the Venetian-Palazzo failed to fully appreciate the suspicious nature of the information or lack thereof pertaining to Ye Gon in the context of the Venetian’s evaluation of whether to file additional SARCs against him earlier and in retrospect should have filed SARCs earlier, and should have filed a more complete SARC when it did file one.”

During his patronage at the Venetian, Ye Gon wire transferred money to the Las Vegas Sands Corp. and subsidiary companies from two different banks and seven different Mexican money exchange houses known as casas de cambios. The wire transfer originators included several companies and individuals the Las Vegas Sands Corp. could not link to Ye Gon. Ye Gon also transferred some funds from Mexican casas de cambios to a Las Vegas Sands Corp. subsidiary in Hong Kong for transfer to Las Vegas. In many instances, Ye Gon’s wire transfers lacked sufficient information to identify him as the beneficiary. The Las Vegas Sands also allowed Ye Gon to transfer funds several times to an account that did not identify its association with the Venetian, specifically an aviation account used to pay pilots operating the company’s aircraft. During its investigation, the government developed evidence that “when casino personnel asked Ye Gon to wire the money in larger lump sums, as opposed to breaking it up incrementally, and use consistent listed beneficiaries, Ye Gon stated that he preferred to wire the money incrementally because he did not want the government to know about these transfers.”

Copies of the Zhenli Ye Gon Arrest and Extradition Complaints are available here and here.

Interestingly, the Journal also reported that the Sands’ relationship with Ausuf Umar Siddiqui was also being examined by the grand jury. Following a 2008 indictment filed in San Jose, Mr. Siddiqui was convicted of taking illegal kickbacks while working as a buyer for Fry’s and wiring the proceeds (which well exceeded $100,000,000) to himself at Sands-operated casinos in Las Vegas. A copy of the government’s complaint against Mr. Siddiqui is available here. The Justice Department’s press release makes no mention of Mr. Siddiqui, and likewise makes no mention of why the government walked away from that issue.

But the Sands case is noteworthy for much more than the underlying investigations and the Ye Gon and Siddiqui cases. We see it as a bellwether, or more specifically, a sign of things to come for casinos operating in the United States. As the Justice Department made clear in its press release,

In short, having already resolved huge money laundering cases with the likes of HSBC, Wachovia, Wells Fargo, Bank of America, JP Morgan Chase, Citibank, Bank of New York, Bank of Hong Kong, Western Union, Pay Pal, and a host of others, Justice may now be turning its focus to casinos, which it may very well perceive as low hanging fruit, flush with cash and easy-to-locate program violations.

Like banks, federal law defines casinos as financial institutions; 31 U.S.C. 5312(X). This includes “Indian gaming operation(s) conducted under or pursuant to the Indian Gaming Regulatory Act other than an operation which is limited to class I gaming”¦” As financial institutions, casinos are required to maintain anti-money laundering compliance programs, which must include, at a minimum, the following critical elements:

(i) A system of internal controls to assure ongoing compliance;

(ii) Internal and/or external independent testing for compliance. The scope and frequency of the testing shall be commensurate with the money laundering and terrorist financing risks posed by the products and services provided by the casino;

(iii) Training of casino personnel, including training in the identification of unusual or suspicious transactions, to the extent that the reporting of such transactions is required by this part, by other applicable law or regulation, or by the casino’s own administrative and compliance policies;

(iv) An individual or individuals to assure day-to-day compliance;

(v) Procedures for using all available information to determine:

(A) When required by this part, the name, address, social security number, and other information, and verification of the same, of a person;

(B) The occurrence of any transactions or patterns of transactions required to be reported pursuant to § 103.21;

(C) Whether any record as described in subpart C of this part must be made and retained; and

(vi) For casinos that have automated data processing systems, the use of automated programs to aid in assuring compliance.

31 C.F.R. 103.64; see also 31 U.S.C. 5318(h).

However, it is not enough for the casino to simply have a compliance program. The program must be designed to protect against the unique money laundering and terrorist financing risks posed by the individual casino, and the program must be implemented. Additionally, to the extent that a casino employee (including dealers and cage personnel) will confront money laundering activities, they must be included as part of the program and given instructions regarding how to report suspicious activity. Finally, the program must be strong enough to withstand not only internal and external reviews, but the scrutiny of the IRS, which has been delegated the authority to audit casinos for compliance with the Bank Secrecy Act. Suffice it to say that the IRS has an extensive background auditing casinos for taxation purposes, and is well equipped to audit casinos for AML purposes too. The IRS is also perfectly willing to use information discovered during a compliance audit for tax purposes, and vice versa. So, again, a robust program, implementation, and the buy-in of all relevant casino employees are all critical, and the failure to have such a program can expose the casino and its directors to civil and criminal liability.

Today’s Wall Street Journal attributed the following quote to Bill Goss, senior director for anti-money laundering at IPSA International: The Sands investigation “will likely bring enhanced scrutiny upon the gaming industry for their anti-money laundering controls and procedures”¦Just one public and egregious incident of this type causes law enforcement and regulators to shine a very bright light on an entire industry group.” We agree. We see the Sands case as a sign of things to come for the casino industry, and a warning to casinos to have their compliance programs in working order as soon as possible.

Fuerst, Ittleman, David & Joseph, PL will continue to monitor the Department of Justice and the casino industry for the latest developments. The attorneys at Fuerst Ittleman David & Joseph, PL have extensive experience in the areas of anti-money laundering compliance, administrative law, constitutional law, white collar criminal defense and litigation against the U.S. Department of Justice. You can reach an attorney by emailing us at contact@fuerstlaw.com or by calling us at 305.350.5690.

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